In this article, we will learn in-depth about Value Added Tax or VAT, including its definition, example, calculation method, importance, classification, and much more.
What is Value Added Tax (VAT)?
Value-added tax or VAT is an important source of income for every government in the world today. It is the key to the economic development of the country.
The tax imposed on the value-added of the product is called Value Added Tax (VAT)
Example Of VAT
For example, if the production value of a soap for a soap-producing company is $10 and if a 15% value-added tax (VAT) is imposed, the amount of value-added tax (VAT) will be 10 * 15% = $ 1.5 and the cost of production with VAT is $10+ $1.5 = $11.5
Formula For Calculation of VAT
Value-added tax or VAT = (Total production or sales value X Value-added tax – Cost of goods X Value added tax rate)
A soap-producing company buys raw materials for $10,000 for the production of its soap and produces the final product soap by processing it and selling it at $ 20,000.
VAT = 20,000X15% – 10,000X15%
Importance and The necessity of Value Added Tax or VAT
We know that value-added tax is a tax amount by which the value of an article has been increased at every stage of production.
The Importance of applying VAT on goods is significant for developing countries. The importance and necessity of value-added tax are discussed below.
- It increases government revenue.
- It helps to collect internal resources.
- Encourages the export of domestic goods and discourages the import of foreign goods.
- Contributes significantly to the socio-economic development of the country.
- It helps reduce government spending.
- Plays an important role in preserving the domestic industry.
- It helps to prevent tax evasion.
Important Information about Value Added Tax (VAT)
- After World War II, VAT was first imposed in Germany in order to boost the economy.
- Value Added Tax (VAT) Rate on Consumer Goods in Bangladesh is 15%
- Value Added Tax (VAT) is an important source of revenue for the government of Bangladesh.
- The Value Added Tax (VAT) was first imposed in Bangladesh in 1991.
- The Value Added Tax (VAT) imposition Act was first introduced in the national Parliament of Bangladesh on June 11, 2019, and passed on July 9, 2019.
- The imposition of Value Added Tax (VAT) was started in 1st July 2019
Classification of Tax
According to the Value Added Tax Act 1991, Bangladesh has three types of taxation systems.
- Value Added Tax (VAT)
- Turnover Tax
- Supplementary tax
Value Added Tax (VAT):
Importer, Manufacturer, Service person or company whose annual sales are more than BDT 15 Lakh, have to pay Value Added Tax (VAT) at a 15% rate.
Individuals or companies whose annual sales are less than BDT 2o lakh, have to pay turnover tax at 4% instead of the value-added tax at a 15% rate.
There are some luxury goods that have been imposed on supplementary taxation even after imposing value-added tax at different rates to discourage the import and use of those which are detrimental to society. The supplementary tax rate is levied up to 3%
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